Tuesday, November 12, 2013

Far East Hospitality Trust: Potential to do better (DBSV)

•Room rates still under pressure
•Refurbishments and repositioning strategies to drive growth
•Downgrade to HOLD, TP revised to S$0.95

A weak quarter. Gross revenues and net property income came in 9.4% below forecasts at S$31.5m and S$27.5m respectively. Interest savings due to lower all-in rates of 2.2% (vs 2.5% forecast) helped to mitigate the drop in distributable income, which at S$24.2m (DPU of 1.41 Scts), is 7.4% lower compared against forecast.

Room rates remain under pressure. RevPARs were 2.6% and 8.9% lower than forecasts at S$167.1/night and S$229.5/night respectively. While average occupancy rates (AORs) remained resilient at c.86.5%-90.2%, average daily rates (ADRs) fell by 2.9% and 10.6% due to the soft operating climate portfolio, made worse by the increased competition from new hotel openings islandwide. With this lower than expected performance, we have tweaked our RevPAR assumptions downwards by c.3-5%.

Strategies to beat the drop. While near-term operational outlook remains weak, positives are likely to come from the ongoing refurbishments of its various hotels, which have received positive response from its corporate accounts. The manager has further refurbishment plans and expect up to 10% of its rooms to be progressively upgraded in 2014. Estimated to cost c.S$10m, the manager expects to achieve S$15-20 increase in ADRs, representing an IRR of 10%.

Downgrade to HOLD, TP S$0.95. Weak near-term visibility and ongoing refurbishment works (closure or rooms and disruption) will likely mean that FEHT’s portfolio will continue to perform below its full potential. Given limited re-rating catalysts in the immediate term, we downgrade our BUY call to a HOLD, TP S$0.95 after accounting for lower DPU estimates and rolling forward to FY14.

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